Concept explainers
1)
Case summary:
Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.
Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs
Here are the net cash flows (in thousand $)
To determine: Whether the
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Intermediate Financial Management
- Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forwardFalkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?arrow_forwardRoberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.arrow_forward
- Vaughn Company is considering a long-term investment project called ZIP. ZIP will require an investment of $122,200. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,700, and annual cash outflows would increase by $39,000. The company's required rate of return is 12%. Click here to view PV table. Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value Whether this project should be accepted? The project should bearrow_forwardWayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $125,600. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,500, and annual cash outflows would increase by $42,000. The company’s required rate of return is 8%. Click here to view PV table.Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value ________? Whether this project should be accepted? The project should be ACCEPTED OR DECLINED???? .arrow_forwardSchultz company is considering purchasing a machine that would cost $478,800 and have a useful life of 5 years. The machinery would reduce cash operating costs by $114,000 per year. The machine would have a salvage value of $6,200. Schultz Company prefers a payback period if 3.5 years or less. compute the payback period for the machine. what does this mean?arrow_forward
- The management of Cooky Electronics Company is considering purchasing equipment to be attached to the main manufacturing machine. The equipment will cost P6,000 and will increase annual cash inflow by P2,200. The useful life of the equipment is 6 years. After 6 years it will have no salvage value. The management wants a 20% return on all investments. Compute net present value (NPV) of this investment project.arrow_forwardYou are considering purchasing a new injection molding machine. This machinewill have an estimated service life of 10 years with a negligible salvage value.Its annual net operating cash flows are estimated to be $60,000. To expect a 15%rate of return on investment, what would be the maximum amount that should bespent on purchasing the injection molding machine?(a) $301,126 (b) $234,645(c) $600,000 (d) $126,450arrow_forwardCullumber Company is considering a long-term investment project called ZIP. ZIP will require an investment of $136,200. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,000, and annual cash outflows would increase by $38,500. The company's required rate of return is 8%. Click here to view the factor table. Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value 1250arrow_forward
- What is the NPV of the mall project? The project would require an initial investment in equipment of $93,600.00 and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). The first annual operating cash flow of $46,600.00 is expected in 1 year, and annual operating cash flows of $46,600.00 per year are expected each year until the project ends in either 3 years or 4 years. In 1 year, the project is expected to have an after-tax terminal value of $81,000.00. The cost of capital for this project is 15.32 percent. $65,052.88 (plus or minus $10) -$18,149.69 (plus or minus $10) $42,758.51 (plus or minus $10) $17,048.63 (plus or minus $10) None of the above is within $10 of the correct answerarrow_forwardYour company is considering to choose one of the two projects: Project Gold and Project Diamond. Each project will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of two projects are provided below. Gold Diamond Cost $485 000 $520 000 Future Cash Flow Year 1 105 850 117 050 Year 2 153 250 162 400 Year 3 225 650 275 500 Year 4 245 000 255 000 Year 5 250 350 260 000 Required: a. Identify which project should your company accept based on Net Present Value method? b. Identify which project should your company accept based on Discounted Payback Period method if the payback criterion is maximum 2.5 years?arrow_forward3. Schultz Company is considering purchasing a machine that would cost $478,800 and have a useful life of 5 years. The machine would reduce cash operating costs by $114,000 per year. The machine would have a salvage value of $6,200. Schultz Company prefers a payback period of 3.5 years or less.Required: a. Compute the payback period for the machine. What does this mean? b. Compute the return on average investment (ROI)arrow_forward
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